Both types of borrowing come with fees, interest and different loan terms so you’ll need to compare the two. Once you compare the total costs you’ll be able to work out which one is cheapest for you. If you have a good credit rating, a personal loan could offer you a lower interest rate. If you have a poor credit score, you may be more likely to be accepted for car finance than a personal loan.
Car finance vs personal loan – what’s best for me?
Wondering what the best way to borrow money to finance a car is? We can help you figure out the best way to get you on the road.
The lowdown on using personal loans to finance a car
Taking out a personal loan to finance your car can offer you flexibility. With a loan you can choose how much you’d like to borrow and over what length of time. They can sometimes be called ‘car loans’ but they’re the same as personal loans – just the loan is being used to pay for a car.
Benefits
- there's no deposit required (if you have no car to trade in or no cash to put towards it this can be helpful)
- you can sort it out in advance, giving you all the haggling power of a cash buyer
- you could settle the loan at any time (you may be charged early repayment fees though)
- you could sell the car at any time - though you still have to pay the loan off
- you may benefit from lower interest rates than some car finance deals
- your monthly repayments are normally fixed so you know how much you need to pay and when.
Considerations
- you need to arrange it yourself unlike car finance which can sometimes be organised by the dealership
- you can't really consider the car truly yours until you've finished paying off the loan
- a bad credit score could hold you back.
Car finance types explained
If you choose to use car finance to pay for your car you have a few different options to weigh up when you've navigated the showroom, including:
Hire Purchase (HP)
This works a bit like a loan, except you need an upfront deposit and the loan is secured against the car. You pay a monthly sum over 12 to 60 months, and at the end, the car is all yours.
Contract Hire (CH)
This one is a bit like leasing. You never own the car, just pay a fixed monthly sum to hire it for a while. At the end of the agreement, you hand the car back and walk away.
Personal Contract Purchase (PCP)
This is a cross between the two. You finance part of the value of the car over a fixed term, and when that term finishes, you either hand the car back and walk away or pay the rest of what the car is worth and keep it.
Is car finance right for you?
The different types of finance mean you have options, but there are still advantages and disadvantages which can help you decide whether it's right for you.
Benefits
- offers flexibility if you're undecided on whether you plan to own the car or not
- often dealerships sort the finance for you
- can help your credit score by showing you can make your repayments on time.
Considerations
- you need the cash to put down as a deposit or a car to trade in
- if you want to sell the car before your term is up – you can’t sell without settling the finance
- it can work out more expensive with the added interest
- there can be restrictions on options
- some cars have a mileage cap, you may be charged extra if you go over on your mileage
- you don’t own the car until right at the end of the agreement.
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How to get a loan
Interested in getting a loan but not sure where to start? Find out more about how to get a loan.
Large loans explained
Learn more about the things you can use a large loan for and how to get accepted for one with our guide.
Early loan repayments
Unsure about early loan repayments and how they work? Find out more in our explainer.